DexCom, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results. DexCom develops and markets continuous glucose monitoring (CGM) systems, including its G6 system.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $451.8 million | $336.4 million | $856.9 million | $616.9 million |
| Gross profit / margin | $284.1 million / 63% | $206.5 million / 61% | $540.6 million / 63% | $375.3 million / 61% |
| Operating income (loss) | $67.8 million | $(0.8) million | $101.4 million | $(15.2) million |
| Net income (loss) | $46.3 million | $(10.5) million | $66.2 million | $(37.4) million |
| Diluted EPS | $0.48 | $(0.12) | $0.69 | $(0.41) |
| Operating cash flow | Not presented quarterly in the supplied filing text | $156.0 million | $76.3 million |
- Revenue rose 34% in Q2 and 39% in the first half, primarily from higher disposable-sensor sales and growth in the worldwide customer base. Pricing pressure from channel strategy and product mix partly offset growth.
- Gross margin improved by 2 percentage points in both comparisons, attributed mainly to revenue growth and manufacturing/design efficiencies. Offsets included manufacturing transition and contract-manufacturing charges, higher first-half inventory charges, and COVID-related payroll costs.
- Q2 operating expenses were $216.3 million, up 4%; first-half expenses were $439.2 million, up 12%. First-half R&D increased 20% to $153.0 million and SG&A increased 9% to $286.2 million.
- First-half investing cash use was $984.7 million, including $890.5 million of net marketable-security purchases and $91.4 million of capital expenditures. Financing provided $912.5 million. Cash flow from operations less capital expenditures was approximately $64.6 million, based on reported figures.
Balance sheet, debt and liquidity
- At June 30, cash and equivalents were $530.0 million and short-term marketable securities were $1,978.8 million, totaling about $2.51 billion, versus about $1.53 billion at December 31, 2019. Most funds were held in the United States and were unrestricted.
- Total assets were $3.52 billion; current assets were $3.03 billion and current liabilities $400.1 million. Stockholders’ equity was $1.35 billion.
- Senior convertible notes had $2.095 billion aggregate principal outstanding and a $1.659 billion carrying value. The company issued $1.21 billion of 0.25% notes due 2025 in May, receiving approximately $1.19 billion net proceeds; it used $282.6 million to repurchase 2022 notes. Remaining principal included $37.2 million due 2022, $850.0 million due 2023, and $1,207.5 million due 2025.
- The company had no revolving-credit borrowings and $194.6 million available under its $200 million facility; it reported compliance with credit covenants. Management said liquidity was expected to cover anticipated requirements for at least 12 months.
Changes, outlook and material matters
- Compared with 2019, the company moved from operating and net losses to positive income, alongside strong revenue growth and improved gross margin.
- COVID-19 effects were mixed: telemedicine and hospital interest in connected remote monitoring supported opportunities, while stay-at-home orders and virtual-care transitions reduced new-patient additions. Management said the overall future effect on operations, financial results and guidance remained uncertain; it gave no specific financial guidance in the supplied filing text.
- DexCom made CGM systems available for hospital use during the pandemic under FDA enforcement discretion, not standard hospital-use authorization. The filing cautions about accuracy limitations, drug interferences, clinical interpretation and potential product-liability exposure.
- Management identified possible COVID-related disruption to customer demand, sales processes, manufacturing, suppliers, distribution, staffing and clinical trials. It also cited pricing/reimbursement pressure, manufacturing scale and quality, single-source suppliers, competition, regulatory approvals, cybersecurity and data privacy as key risks.
- A confidential global settlement of litigation with AgaMatrix/WaveForm was reached in March 2020; DexCom made a one-time payment, received certain IP licenses, and the proceedings were dismissed. No contingent-loss accrual remained for those suits at June 30.
- On June 29, DexCom gave notice to redeem remaining 2022 notes on July 31 unless converted. Subsequent to quarter-end, through July 24, holders converted $32.5 million principal into shares. The filing also reports a $5.4 million Q2 loss on extinguishment of debt from repurchases and conversions.
Investor verification points
- Verify whether revenue growth, sensor demand and channel mix remain sustainable, and how much pricing pressure affects realized revenue and margins.
- Track COVID-19 effects on new-patient additions, telemedicine, hospital use, customer access/reimbursement, supply continuity and clinical-development timelines.
- Review the conversion/redemption outcome for the remaining 2022 notes, future convertible-note cash or share settlement, interest expense and potential dilution.
- Monitor manufacturing capacity, product quality, inventory levels and obsolescence charges; first-half excess and obsolete inventory charges were $6.8 million.
- Assess concentration among major distributors: four distributors each generated at least 10% of first-half revenue, according to the filing.
- Confirm cash generation against capital spending and contractual commitments, including approximately $165 million of open purchase orders and ordinary-course contractual obligations at June 30.